Before Acquiring a Physician Practice, Assess the Risks

Many hospitals across the country have been acquiring physician practices as the trend of integration spreads. After all, acquiring physician practices allows for better integration, which can lead to increased efficiency and quality of care. Also, hospitals can gain market share by expanding services through acquiring practices.

However, there are some significant risks associated with acquiring physician practices. In a recent white paper, Lockton, a risk management and insurance company, outlines some major risks that should be assessed by a hospital or health system before it acquires a new physician practice, in order to avoid losing money or breaking the law as a result of the acquisition.

Do due diligence

If a hospital is considering acquiring a new physician practice, executives should look into the history of the practice and the providers in it, to determine their insurability. "Loss runs should be obtained for review, as physicians may not recall their total loss history, especially if they've been in practice for a long time," the white paper authors wrote. Doing due diligence can allow the hospital to determine if it should move forward with the acquisition or if the practice poses too much of a risk.

If a practice makes it past the initial due diligence stage of an acquisition, other risks involved in an acquisition should also be assessed.

Malpractice coverage

Usually, post-acquisition malpractice premiums will be paid by the hospital for employed physicians, but, according to the white paper, the real risk comes with tail coverage negotiations. "The physician will invariably request that the hospital purchase tail coverage for run-off coverage…and likely, this request will come at the end of an otherwise successful negotiation," the authors said. Physician liability for past activity poses a financial risk for the hospital attempting to acquire the practice, so hospitals should be prepared to negotiate the coverage with physicians.

The practice's corporate entity

Hospitals should investigate the physician's corporate entity, such as its practices and compliance with state and federal law. "Recognize that post acquisition, the hospital may well be responsible for payment of any Medicare violations of the prior practice," said the white paper authors.

Hospitals should also make sure the soon-to-be acquired practice is compliant with HIPAA and see how the electronic risk profile of the practice changes after a merger, according to the white paper authors.

Finally, when a hospital employs a physician, it is investing a lot of time and money into that physician and expects him or her to be a source of revenue in the future. "As such, [the physician] should be viewed as 'key person' insurable assets of the organization," said the authors. The hospital should protect the employed physicians and may need to look into a new approach to life, disability and retirement products to do so.